Source: Marketwatch
San Francisco— Gold futures fell as much as $10 an ounce Monday to trade near a three-week low, tracking a steep decline in crude prices as an Israeli-Lebanese ceasefire came into effect and the U.K. government downgraded its terror threat.
"As the guns fell silent in Lebanon and hopes for peace finally won the upper hand, the key 'worry-index' markets — oil and gold — retreated as expected," said Jon Nadler, an investment products analyst at Kitco.com.
Gold for December delivery moved down $6.90 to stand at $637.50 an ounce on the New York Mercantile Exchange, having earlier fallen to $634.20, the lowest intraday level seen since July 26.
Crude for September delivery touched its lowest level in almost seven weeks, pulling back as traders began to unwind the month-old premium built up on worry about potential supply disruptions if the violence between Israel and the Hezbollah militia in Lebanon might broaden to include oil-producing countries in the Middle East.
"Gold prices slipped at least 1% lower, in tandem with a similar magnitude decline in crude oil," said Nadler. "Prices may still remain confined within a range of from $615 to $645 but risks are on the rise that the break to $600 or $580 that did not materialize in June may now come about — especially if month-end news connected to Iran also show hopes for a compromise agreement between it and the Western powers."
"At that juncture, the premiums related to global unrest will have been brought down to a minimum number and bullion will have to show its structural foundations (tenuous supplies, robust jewelry demand, sufficient investment interest) as being still strong, in order to continue to be perceived as a decent value 'buy' proposition as we head into the final quarter of 2006," he said.
Rally on tap?
Ned Schmidt, editor of the Value View Gold Report called the selling in gold "overdone," pointing out that it's unlikely the peace in the Middle East will last.
"Gold [is] moving to near optimal short-term oversold between now and Wednesday [on] excessive optimism," he said. "Investors able to see past morning news should be buying through Wednesday."
Indeed, "the markets are being whipsawed by every minor news item and comment by anyone of any importance around the globe," said Dale Doelling, chief market technician at Trends In Commodities. "This makes for an extremely difficult trading environment."
If current market conditions are short-lived and short-term trends emerge once again, "the likelihood that the metals markets can push to new all-time highs will rise dramatically," he said.
Prices may see a "major rally" in early September, according to Peter Grandich, editor of the Grandich Letter, who said he believes gold is going through a "classic bull-market consolidation."
"A new yearly high above $735 is likely before year's end thanks to a combination of geopolitical concerns here and abroad, strong seasonal demand and the recognition that the U.S. dollar is terminally ill," he said.
Mirrored moves
Analysts at Standard Bank noted that gold may begin to attract buying interest from investors in the oil-rich Middle East in light of the recent correlation between gold and crude prices.
"Historically, gold and crude oil have moved in rather similar patterns, and statistically, the gold-to-crude ratio averaged around 1:15, up until recently with current cross valuation at about 1:9," they said in a note to clients.
"This suggests that gold is relatively undervalued in terms of crude," Standard Bank said.
Overall, however, it "does not look like terrorism/geopolitical concerns are really giving gold any sort of lift," according to Peter Spina, chief investment strategist at GoldSeek.com.
"If anything, it is a result of the effect on the oil price as gold has been tracking the oil price movements of late," he said, adding that he sees "illiquid summertime trading right now and we expect gold to return from summer vacation in a few weeks' time."
On the Israel-Lebanon board, a United Nations-brokered cease-fire took effect at 1 a.m. Eastern Time, raising hopes for an end to the conflict that has claimed more than 1,000 lives.
Reports said the truce was holding Monday. Thousands of Lebanese refugees began the journey home, although Israeli troops stayed put to await the arrival of an international peacekeeping force.
Meanwhile, the U.K. government downgraded its terror threat to severe from critical and said that while an attack was "highly likely," it wasn't "imminent."
The government also eased restrictions on flying imposed last week after apparently thwarting a plot to blow up airplanes en route to the United States. Passengers departing U.K. airports will now be allowed to take one item of hand luggage on board, although liquids are still banned. See full story.
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